Chinese economic instability poses challenge to global commodity demand

China’s wavering economy is now a significant concern for global commodity demand. As economic activity and credit flows within the world’s top buyer face challenges, Beijing’s conservative growth targets might be at risk.

While commodities have withstood economic setbacks better than other assets and pandemic restrictions have been lifted, fuel consumption has seen an uptick.

Hopes for governmental stimuli to boost growth and signs of a seasonal demand resurgence keep some markets afloat.

Yet, numerous concerns persist. A prolonged housing market crisis, deflation, weakening exports, and a falling yuan are all on the radar for traders.

Structurally, China’s intent to pivot from a consumption-led economy to an investment-led one impacts various sectors differently, potentially benefitting fuel and food but not traditional economy metals linked to construction.

While China’s robust investment in clean energy might spur demand for green transition-related commodities like copper, there’s the offsetting decline in fossil fuel demand.

Base metals have experienced a decline from their January peak as economic cooling pressures the profitability of smelting companies and manufacturers.

Profitability drops in H1 mark the poorest performance in over a decade.

For instance, aluminum producers face shrinking margins due to fierce competition and price wars, as observed by analyst Wang Rong.

The construction sector accounts for nearly 40% of China’s steel demand, and iron ore remains a stalwart of the traditional economy.

Seasonal demand often rises at summer’s end, influencing furnace operation rates and reducing iron ore stockpiles.

However, the housing market’s status makes steel mills hesitant to import more, notes analyst Steven Yu.

Oil shipments remain a bright spot in China’s commodity imports for H1, with demand growth accounting for 40% of the global figure.

However, imports are seeing a dip, indicating potential challenges.

China’s favored meat, Pork, hasn’t seen the surge expected post-pandemic.

Households are cutting back amid economic uncertainties, affecting the broader economy due to pork’s significant share in the consumer price basket.

This played a role in July’s consumer price deflation.